Innovation

August 18, 2015 By Don Springer Leave a Comment

Affordable Loss

In the early 70s, Hewlett-Packard engaged SRI International, the premier computing research group, to assess the market for an electronic scientific calculator. After a great deal of market research, SRI concluded that the product wouldn’t “sell” even though the primary alternative was a slide rule. As Peter Sims recounted the story in Little Bets, Bill Hewlett wasn’t so sure about the conclusion.

With $30 billion in sales at that time, HP’s organizational bias only considered opportunities that were going to be billion dollar businesses. Hewlett, however, had recently had a lengthy discussion about the calculators on a plane with a fellow passenger who was amazed by the product. After performing his own casual, informal research, Hewlett suggested that they build a thousand units and “see what happens”. Within five months, HP was selling one thousand units per day. Testing a thousand units was an affordable bet for HP.

Saras Sarasvathy, researcher at the Darden School of Business, University of Virginia, would characterize the approach as an “affordable loss”. She found affordable loss to be one of the operational principles used by expert entrepreneurs to launch a business in the face of the unknown. While a causal approach to a business or product launch would select optimal strategies to maximize returns, the entrepreneurial approach estimates the downside and examines what is an affordable loss to start the venture or launch the new product.

Sarasvathy calls the entrepreneurial approach the “effectual approach” since it begins with the known and moves to the unknown. The causal approach requires estimates of future sales and the risks that impact cost of capital while the effectual approach of the expert entrepreneur requires only that they know their current financial condition and a psychological assessment of their commitment in the face of a worst case scenario, i.e., their affordable loss. In the causal approach, all of the information is about things outside of the decision makers’ control while the effectual approach is about things within the decision makers’ control.

The effectual approach works for the entrepreneur or the new product manager if one is open to adapting the venture to the means-at-hand as opposed to an idea based on analysis of the future. One approach is about predicting the future and one approach is about designing the future. By choosing not to constrain themselves to a pre-conceived market, entrepreneurs and product marketers open themselves to the businesses or markets that will resonate with them, even if those markets do not exist today. Hewlett was able to test the non-existent electronic scientific calculator market by knowing and accepting his affordable loss.

August 11, 2015 By Don Springer Leave a Comment

Transient Competitive Advantage

In a Harvard Business Review article (June 2013), Rita McGrath, professor of management at Columbia Business School, stated that long term sustained competitive advantage has been the dominant idea in the field of strategy for too long. With the turbulent changes companies and industries are undergoing, it is rare for a company to maintain a lasting advantage. The reasons are familiar: the digital revolution, a “flat” world, fewer barriers to entry, and globalization. In a world where advantage evaporates in less than 12-18 months, companies cannot afford to spend months developing a single competitive strategy.

McGrath proposes instead that companies continually start new initiatives, building and exploiting many transient competitive advantages. She sees the life cycle of competitive advantages as a wave, starting with launch, peaking at exploitation, and ending with reconfiguration and finally disengagement. Each phase requires different skills from the workforce and different metrics for process and success. To create a portfolio of transient advantages requires shifts in the way companies operate and McGrath suggests a guide to those shifts as follows:

Consider arenas instead of industries – Today industry lines are quickly blurred and competition can come from outside your industry. Thinking about arenas considers customer segments, the offer, and the place of delivery.
Let people experiment within broad themes – With a shift to arenas, simply analyzing markets is insufficient. You must add pattern recognition, direct observation, and evironmental weak signals to the mix.
Adopt metrics supporting entrepreneurial growth – Rather than ROI, use affodable loss to evaluate new moves, for example.
Focus on customer experience and solutions to problems – refrain from internally focused solutions versus well-designed experience and complete solutions to customer problems
Build strong relationships and networks – investing in communities and networks strengthens the ties to customers and employees
Learn healthy disengagement – find ways to continually adjust and readjust internal resources keeping downsizing to a minimum
Systematic innovation – creating and continually filling a pipeline of innovations within the organization
Experiment, iterate, and learn – the approach to new initiative is different than established business – discovery followed by business model definition and incubation.

Strategy is still useful and important, but it requires continual choices about where you want to compete, how you intend to win, and how you will move from advantage to advantage. As McGrath says, strategy is more important than ever.